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FASB Speaks on Fair Value of Liabilities; More

Tammy Whitehouse | April 15, 2008

Searching for a way to guide a confused market on measuring the value of illiquid liabilities, the Financial Accounting Standards Board wrestled last week yet again with how exit prices should be used to determine the fair value of liabilities.

FASB met last week to hammer out revisions to its proposed guidance in FASB Staff Position No. 157-c, Measuring Liabilities under FASB Statement No. 157. FAS 157 is the new standard on fair-value measurement that says companies should mainly rely on market activity, not their own transactions, to determine the fair value of assets and liabilities where it is required throughout U.S. Generally Accepted Accounting Principles.

Applying FAS 157 is difficult partly because of unprecedented, ongoing turmoil in credit markets, where debt trading has come to a virtual halt. That leaves companies with precious little market activity to use as a benchmark in the valuation process. It’s also tough because FAS 157 explicitly prohibits the sole reliance on an entity’s own transaction data as the reported book value for an asset or a liability.

In its proposed staff position, FASB offered entities a way out of the jam caused by market inactivity. The guidance states (in bold-face type, no less): “In the absence of a quoted price for the identical liability in an active market, the reporting entity may measure the fair value of its liability at the amount that it would receive as proceeds if it were to issue that liability at the measurement date.”

Commenters had flagged that as inconsistent with the principles of FAS 157, which specifically prohibits the use of entity-specific data above market data. FASB staff proposed that the Board adopt new language to bring the guidance closer to FAS 157’s requirements for companies to consider market data and develop assumptions about what market participants would pay to settle a particular liability. That touched off a debate not just about the language solution, but also about the requirements of FAS 157 in general.


In the case of a liability that can’t be transferred, especially where contractual terms specifically prohibit it, FAS 157 is a flawed concept in the minds of at least a few board members, most notably Chairman Robert Herz and Tom Linsmeier. “If you have restrictions and there is no ability to transfer, either because it’s restricted or because nobody wants to assume these types of liabilities, your only exit is performance or settlement,” Herz said at last week’s meeting. “Settlement value would be exit value.”

The exit price is the amount a company has paid, or would pay, to settle a liability. While FAS 157 requires the use of market data and hypothetical transactions over the use of exit prices, the International Standards Board has openly disagreed with FASB’s view. IASB is still developing its fair-value measurement standard and has already said its standard will not demote the significance of exit value to the extent FASB has in FAS 157.

FASB has stuck to the market data concept because it believes that leads to a more consistent approach, which leads to more comparability among financial statements. Herz disagrees. “Forcing people to do mental gyrations into parallel universes—I don’t see the cost benefit of that or the relevance of that,” he said. “It’s less relevant, probably less reliable, takes more time, and it’s more costly than trying to get directly to what reality is.”

Following extensive sparring over how to get guidance out quickly—FAS 157 is already in effect and companies are stumped on how to measure thinly traded instruments—the Board agreed to tweak the language to point preparers toward some reasonable assessment of market data to the extent it is available without undue search or burden. Herz promised to dissent unless the Board labels it a “practical expedient,” departing from the conceptual requirements of FAS 157. Linsmeier also promised dissent.

“This is changing the fair-value measurement attribute,” he said. “This is new thinking. The fair-value measurement attribute says you want exit price in a market by transferring. For certain liabilities at the current date, the only way you can transfer in an exit price is to settle with the counterparty. Period.”

FASB Releases SEC Content Into Codification Tool

FASB has updated its online Codification Research System to include content from the Securities and Exchange Commission as it pertains to U.S. Generally Accepted Accounting Principles.

FASB’s codification of GAAP is available on the Board’s Website for a one-year verification phase. Users are free to access the online GAAP research tool and comment on it for continued tweaking. The Board said it recently added selected portions of SEC and SEC staff guidance covering roughly 90 accounting topics. It has been reorganized to more closely align with the existing codification, FASB said in a written statement.

The SEC sections focus on issues related to the financial statements, rather than other issues the SEC might address, such as management discussion and analysis, auditing, or independence. FASB said it expects the content in the SEC sections to change over time as the Commission and staff continually update and provide new guidance. The codification of SEC guidance doesn’t change how guidance is exposed for comment or published, but makes existing guidance available via the online research tool, FASB said.

FASB launched the one-year verification phase of the online research system in January. Users who register can review the codification free of charge and provide feedback both on the content and the system in general.

FASB stresses, however, that the system is a work in progress; for example, it does not yet contain GAAP on business combinations or on financial services insurance. FASB says companies should verify any research via the codification tool using traditional research methods. In early 2009, FASB expects to approve the non-SEC codification content as the single authoritative source of U.S. accounting and reporting standards.

The PCAOB Small-Business Road Show Continues

The Public Company Accounting Oversight Board will carry on with its Forums on Auditing in the Small Business Environment in 2008, scheduling stops in seven cities throughout the year to share important information with registered public accounting firms and public companies operating in the small-business community.

The Board has scheduled forums in Santa Monica, Calif.; San Francisco; Dallas; Chicago; Philadelphia; Fort Lauderdale, Fla.; and New York. The agenda will include a discussion of practical quality control policies and procedures and evolving accounting and auditing issues, including the application of certain auditing standards and observations from the Board’s disciplinary orders.

In addition, the 2008 agenda will include a discussion of the implementation of Auditing Standard No. 5. Smaller companies are required to provide a management assessment of internal controls, but are not required to include an auditor’s report with that assessment until 2009.


The PCAOB began a pilot program of small-business forums in November 2004 and has continued offering the sessions in cities across the country. The Board has met with more than 2,300 representatives of small registered public accounting firms and small public companies as a result of the forums.

“Small-business forums have been an effective way to share timely information about the PCAOB’s oversight programs with small firms,” PCAOB Chairman Mark Olson said in a written statement. “In addition, the forums provide an opportunity for small firms and issuers to discuss issues facing the small-business community with us and each other in an informal setting.”